Chapter 5 - Decision Making

1. DECISION MAKING

2. OBJECTIVES
• Recognize decision making as responsibility of management;
• Describe the nature of decision making;
• Examine the steps in the decision making process;
• Assess various approaches in decision making; and
• Determine quantitative model for decision making.

3. INTRODUCTION
• Managers of all kinds and types are primarily tasked to provide leadership in the quest
for the attainment of the organization's objectives. If he is to become effective, he must
learn the intricacies of decision making. Many times, he will be confronted by situations
where he will have to choose from among various options. Whatever option he
chooses, it will have effects good or bad, immediate or long term, in the operations of
his organization.
• The manager's decision making skills are very crucial to his success as a professional.
A major blunder in his decision making may be sufficient to cause the destruction of his
organization. On the other hand, when good decisions are made, the right environment
is provided for continuous growth and success of any organized effort.

4. DECISION AS MANAGEMENT RESPONSIBILITY
• Decisions must be made at various levels in the workplace. They are also made at various stages in
the management process. If certain resources must be used, someone must make a decision
authorizing certain persons to appropriate such resources.
• Decision making is a responsibility of the manager. It is understandable for manager to make wrong
decisions at times. The wise manager will correct them as soon as they can be identified. The
bigger problem is the manager who cannot or does not want to make decisions. This type of
manager is dangerous to the organization and should be replaced immediately with qualified ones.
• Management must strive to learn how to choose a decision option as correctly as possible. Since
managers have that power to decide, they are responsible for whatever outcomes their decisions
bring. The higher the management level is, the bigger and more complicated decision making
becomes. An example is the manager of a retailing firm has decided to open a branch in one of the
provinces within his area of assignment After considering various towns the manager came to a
conclusion that his choice must be one of the three potential sites identified. Each of the sites has
advantages and disadvantages. The manager must make a decision quickly. His choice, however,
must be based on sound criteria. The manager will be held responsible later on, if he made the
wrong decision.

5. WHAT IS DECISION MAKING?
• Decision making is the process of defining the problem and identifying and choosing
alternative courses of action in a manner appropriate to the demands of the situation. The
definition indicates that the manager must adapt a certain procedure designed to
determine the best option available to solve certain problems.
• Decisions are made at various management levels te g. top, middle, and lower levels) and
at various management functions (eg planning, organizing directing, and controlling)
Because of this decision making is regarded as the heart of all the management
functions.
5

6. THE DECISION MAKING PROCESS
• Rational decision making is a process involving the following steps:
1. Diagnosing the Problem. If the manager wants to make an intelligent decision, his first move must be to identify the problem. If
the manager fails in this aspect, his next moves will be useless. If the manager is not able to identify the real problem the
solution he will offer will be irrelevant and may even be costly and destructive. Being able to identify the real problem is
tantamount to having the problem half solved.
• A problem exists when there is a difference between the actual situation and the desired situation. For instance, the
management of a construction company entered into a contract with another party for the construction of a 25-storey building on
a certain site. The actual situation (or the existing situation) is that the firm has not yet constructed the building. The desired
situation is the finished 25-storey building. In this case, the actual situation is different from the desired situation. The company,
therefore, has a problem and that is, the construction of the 25-storey building.
2. Analyzing the Environment. The environment where the organization is situated plays a very significant role in the success or
failure of such an organization. It is therefore very important that an analysis of the environment is undertaken.
• The objective of environmental analysis is the identification of constraints, which may be internal or external limitations.
Examples of internal limitations are as follows:
a. limited funds available for the purchase of equipment.
b. limited training on the part of the employees.
c. ill designed facilities, and
d. irrelevant organization structure.

7. • Examples of external limitations are as follows:
a. product patents are controlled by other organizations;
b. a very limited market for the company's products and services exists; and
c. strict enforcement of local zoning regulations
• When decisions are to be made, the internal and external limitations must be considered. It may be costly, later on, to
alter a decision because of a constraint that has not been previously identified. The following is an illustration of failure
to analyze the environment:
• The president of a new chemical manufacturing company made a decision to locate his factory in a place adjacent to a
thickly populated area. Construction of the buildings were made with precision so that they were finished in a short
period. When the clearance for the commencement of operations was sought from local authorities, this could be given.
It turned out that the residents oppose the operation of the firm and they took steps to make sure that no clearance is
given.
• The president decided to relocate the factory but not after much time and money have been lost. This is a clear
example of the cost associated with management decisions disregarding the environment. In this case, the president
did not consider or anticipate opposition from local residents.
• The internal environment consists of organizational activities within a firm that surround decision making. Shown in
Figure 12 are the important aspects of the internal environment.
• The external environment refers to variables that are outside the organization and not typically within the short-run
control of top management. Figure 13 shows the forces comprising the external environment of the firm.
7

8. INTERNAL
ENVIRONMENT
ORGANIZATIONAL
ASPECTS
organizational structure,
policies, procedures,
rules, ability of
management, etc.
MARKETING ASPECTS
product strategy,
promotion strategy, etc.
PERSONNEL ASPECTS
recruitment practices,
incentive systems, etc.
PRODUCTION
ASPECTS
plan facility layout,
inventory control, etc.
FINANCIAL ASPECTS
liquidity, profitability, etc.
8
DECISION
EXTERNAL
ENVIRONMENT
EXTERNAL
ENVIRONMENT

9. 9
THE FIRM
GOVERNMENT
LABOR UNIONS
SUPPLIERS
BANKS
PUBLIC
COMPETITIORS
THE FIRM AND THE INTERNAL ENVIRONMENT IN
DECISION MAKING

10. 3. Develop Viable Alternatives. Oftentimes, a problem may be solved by any of the solutions
offered. In solving a problem, however, the best among the alternative solutions must be
considered by management. This is made possible by using a procedure with the following steps:
a. prepare a list of alternative solutions;
b. determine the viability of each solution; and
c. revise the list by striking out those which are not viable.
• To illustrate: An engineering firm has a problem of increasing its output by thirty percent. This is
the result of a new agreement between the firm and one of its clients. The list of solutions
prepared by the manager shows the following alternative courses of action:
a. improve the capacity of the firm by hiring more workers and building additional facilities;
b. secure the services of subcontractors;
c. buy the needed additional output from another firm;
d. stop serving some of the company's customers; and
e. delay servicing some clients.
• The list was revised and only the first three were deemed to be viable. The last two were deleted
because of adverse effects in the long-run profitability of the firm.

11. 4. Evaluate Alternatives. After determining the viability of the alternatives and a revised list is made, an
evaluation of the remaining alternatives is necessary. This is important because the next step involves
making a choice. Proper evaluation makes choosing the right solution less difficult.
• How the alternatives will be evaluated will depend on the nature of the problem, the objective of the firm,
and the nature of the alternatives presented. Each alternative must be analyzed and evaluated in terms
of value, cost and risk characteristics.
• The value of an alternative refers to benefits that can be expected from it. An example may be described
as follows: a net profit of P10 million per year if the alternative is chosen.
• The cost of the alternative refers to out-of-pocket costs (like P100 million for construction of facilities),
opportunity costs (like the opportunity t of P2 million per year if money is invested in another
undertaking), and follow-on earn interest costs (like P3 million per year for maintenance of facilities
constructed).
• The risk characteristics refer to the likelihood of achieving the goals of the alternatives. If the probability of
a net profit of P10 million is only 10 percent, the decision-maker may opt to consider an alternative with a
P5 million profit, but with an 80 percent probability of success.
• Another example of an evaluation of alternatives is shown below:
• A manager is faced with the problem of choosing between three applicants to fill a lone vacancy for Sales
Supervisor. He will have to set up certain criteria for evaluating the applicants. If a professional human
resources officer does not do the evaluation, the manager will be forced to use a predetermined criterion.
The following is a typical evaluation of job applicants.

12. APPLICANT EDUCATION TRAINING EXPERIENCE AGE TOTAL POINTS
1. JOSE SIBAYAN
JR.
40 35 4 10 80
2. MENANDRO
RILLON
40 36 5 9 90
3. DANTE DELA
CRUZ
40 38 6 7 91
12
EVALUATION SHEET
Title of Vacant Position: SALES SUPERVISOR
Date of Evaluation: December 28, 2012
Evaluator:
Edgardo J. Viloria
Manager
Marketing Department

13. 13
FIGURE 14: FEEDBACK AS A CONTROL MECHANISM IN THE DECISION
MAKING PROCESS
If Results are Achieved
Evaluate Results
Implement Decision
Make a Choice
Evaluate Alternatives
Develop Viable Alternatives
Articulate Problem or Opportunity
Analyze Environment
Diagnose Problem
If results are not achieved
Adapt decision results
Determine steps
where errors was
made

14. 5. Make a Choice. After the alternatives have been evaluated, the decision-maker must now be ready to make a choice. This is the
point where he must be convinced that all the previous steps were correctly undertaken.
• Choice-making refers to the process of selecting among alternatives representing potential solutions to a problem. At this point,
specific effort should be made to identify all significant consequences of each choice
• To make the selection process easier, the alternatives can be ranked from best to worst on the basis of some factors like benefit,
cost, and risk
6. Implement Decision. After a decision has been made, implementation follows. This is necessary or decision making will be an
exercise in futility. Implementation refers to carrying out the decision so that the objectives sought will be achieved. To make
implementation effective, a plan must be devised.
• At this stage, the resources must be made available so that the decision may be properly implemented. Those who will be
involved in implementation must understand and accept the solution; otherwise, the execution of the plan will be a failure.
7. Evaluate and Adapt Decision Results. In implementing the decision, the results expected may or may not happen. It is,
therefore, important for the manager to use control and feedback mechanisms to ensure results and to provide information for
future decisions.
• Feedback refers to the process which requires checking each stage of the process to assure that the alternatives generated, the
criteria used in evaluation, and the solution selected for implementation are in keeping with the original goals and objectives.
• Control refers to actions made to ensure that activities performed match the desired activities or goals that have been set.
• In this last stage of the decision making process, the manager will find out whether or not the desired result is achieved. If the
result was positive, one may assume that the decision made was good. Otherwise further analysis is necessary. Figure 14
presents an elaboration of this last step.
14

15. APPROACHES IN DECISION MAKING
• In decision making, the manager is faced with problems, which may either be simple or complex To provide him with some guide,
he must be familiar with the following approaches
1. Qualitative Evaluation This term refers to evaluation of alternatives using intuition and subjective judgment. Managers tend to
use the qualitative approach when:
a. the problem is fairly simple,
b. the problem is familiar,
c. the costs involved are not great; and
d. immediate decisions are needed.
• An example of an evaluation using the qualitative approach is as follows.
• A factory operates on three shifts with the following schedule:
 First shift - 6:00AM to 2:00 PM.
 Second shift - 2:00 PM to 10:00 PM.
 Third shift 10:00 PM to 6:00 AM.
• Each shift consists of 200 workers manning 200 machines One day, the operations were going smoothly until the factory
manager was notified at 1:00 P.M. that five of the workers assigned to the second shift could not report for work because of
injuries sustained in a traffic accident while they were on their way to the factory, Because of time constraints, the manager made
an instant decision on who among the first shift workers would work overtime to man the five machines.

16. 2. Quantitative Evaluation. This term refers to the evaluation of alternatives using any technique in a
group classified as rational and analytical. The types of quantitative techniques, which may be useful in
decision-making, are as follows:
a. Inventory Models. Inventory models consist of several types all designed to help the manager make
decisions regarding inventory. They are as follows:
i. Economic Order Quantity Model-is used to calculate the number of items that should be ordered at one
time to minimize the total yearly cost of placing orders and carrying the items in inventory.
ii. Production Order Quantity Model-is an economic order quantity technique applied to production orders.
iii.Back Order Inventory Model - is an inventory model used for planned shortage.
iv.Quantity Discount Model - is an inventory model used to minimize the total cost when suppliers offer
quantity discounts.
b. Queuing Theory. The queuing theory is one that describes how to determine the number of service units
that will minimize both customers' waiting time and cost of service.
• The queuing theory is applicable to companies where waiting lines are a common situation. Examples
are cars waiting for service at a car service center, ships and barges waiting at the harbor for loading and
unloading by dockworkers, programs to be run in a computer system that processes jobs, and so on.
c. Network Models. These are models where large complex tasks are broken into smaller segments that
can be managed independently. The two most prominent network models are:

17. i. Program Evaluation Review Technique (PERT) is a technique which enables managers to schedule,
monitor, and control large and complex projects by employing PERT times which are the estimated times
for the completion of activities. PERT times may be derived by calculating the weighted averages of three
separate time estimates, namely:
• Optimistic Time Estimate - refers to the time an activity may be completed under the best conditions.
• Most Likely Time Estimate-refers to the time an activity may be completed under normal conditions.
• Pessimistic Time Estimate - refers to the time an activity may be completed under worst possible
conditions.
ii. Critical Path Method (CPM) is a network technique using only one time factor per activity that enables
managers to schedule, monitor, and control large and complex projects. The critical path is that potential
path to completion of a project, which is indicated in a CPM diagram. The critical path is the longest path
and any activity in that path must not be delayed or it will jeopardize the total time allotted to the project.
d. Forecasting. There are instances when managers make decisions that will have implications in the
future. A manufacturing firm, for example, must put up a capacity, which is sufficient to produce the
demand requirements of customers within the next 12 months. As such, manpower and facilities must be
procured before the start of operations. To make decisions on capacity more effective, the manager must
be provided with data on demand requirements for the next 12 months. This type of information may be
derived through forecasting. Forecasting is actually collecting past and current information to make
predictions about the future.

18. e. Regression Analysis. It is a forecasting method that examines the association between two or more variables. It uses data from the past
to predict future events. Regression analysis may be simple or multiple depending on the number of independent variables present. When
one independent variable is involved, it is called simple regression; when two or more independent variables are involved, it is called
multiple regression.
f. Simulation. It is a model constructed to represent reality, on which conclusions about real-life problems can be based. It is a highly
sophisticated tool by means of which the decision maker develops a mathematical model of the system under consideration. Simulation
does not guarantee an optimum solution, but it can evaluate the alternative fed into the process by the decision maker.
g. Linear Programming. It is a quantitative technique that is used to produce an optimum solution within the bounds imposed by constraints
upon the decision. Linear programming is very useful as a decision-making tool when supply and demand limitations at plants,
warehouses, or market areas are constraints upon the system.
h. Sampling Theory. It is a quantitative technique where samples of populations are statistically determined to be used for a number of
processes, such as quality control and marketing research. When data gathering is expensive, sampling provides an alternative. Sampling
in effect saves time and money.
i. Statistical Decision Theory. It is the rational way to conceptualize, analyze, and solve problems in situations involving limited, or partial,
information about the decision environment. A more elaborate explanation of the decision making process is presented at the beginning of
this chapter. On the evaluation of alternatives, it is very important to subject the alternatives to Bayesian analysis.
• The purpose of Bayesian analysis is to revise and update the initial assessments of the event probabilities generated by the alternative
solutions. This is achieved by the use of additional information. When the decision-maker is able to assign probabilities to the various
events, the use of a probabilistic decision rule, called the Bayes criterion, becomes possible. The Bayes criterion selects the decision
alternative having the maximum expected payoff, or the minimum expected loss if he is working with a loss table.

19. SUMMARY
• Decision making is a very important function of the manager. His organization will rise or fall
depending on the outcomes of his decisions. It is, therefore, necessary for the manager to develop
some skills in decision making.
• The process of identifying and choosing alternative courses of action in a manner appropriate to the
demands of the situation is called decision making It is done at various management levels and
functions
• The decision making process consists of various steps, namely diagnose problems, analyze the
environment, articulate the problem or opportunity, develop viable alternatives, evaluate
alternatives, make a choice, implement the decision, and evaluate and adapt the decision.

20. THANK YOU
2 0 X X C o n f e r e n c e p r e s e n t a t i o n 20
AND NOW THESE THREE REMAIN: FAITH HOPE AND LOVE. BUT THE GREATEST OF
THESE IS LOVE.
1 CONRINTHIANS 13:13